Long before HP made today’s announcement that it would write off $8.8 billion on its acquisition of software maker Autonomy, onlookers were asking questions about whether the numbers at the UK based company made sense. With HP now speaking of ”serious accounting improprieties” and “outright misrepresentations” at the company, it’s worth looking back at what was being asked long before the U.S. tech giant did the $10.25 billion deal last year.

The Daily Telegraph understands that no analysts with a “sell” rating on the stock were apparently able to ask a public question after the company presented its third-quarter results yesterday. Several analysts claimed they are often prevented from asking Mike Lynch, Autonomy’s chief executive, and Sushovan Hussain, finance director, difficult questions.

“They didn’t let any of the people they knew were bearish ask any questions. If you’re a bear, there was no way that mic was coming in your direction,” one analyst said of the meeting on Tuesday

Another analyst said: “Autonomy must have been practising for a week… everything was read from a piece of paper. It was all done so no one could ask any questions.”

In January 2010, the FT reported some analysts were wondering about the company’s organic earnings growth – of the previous 16 quarters, only two had gone by without an acquisition clouding the earnings picture. And there were also questions over the quality of those earnings:

Autonomy’s calculation of the conversion of its profits into cash – a sign of the quality of earnings – has also been debated. The group has estimated that it is about 100 per cent, but some analysts, such as Paul Morland at Astaire Securities and Kevin Ashton at Canaccord Adams, have put the figure at just more than 70 per cent.

The two ratios are important as analysts use them as a guide to help determine whether a company is booking revenues aggressively before collecting the cash. Autonomy has denied it has poor cash conversion. It argues that because it is growing rapidly, but collects cash a quarter in arrears, the amounts coming in will always look small compared with current trading.

From analysts at 451 Research in July 2010, questions about the growth rate of the company’s core software product, known as IDOL:

Organic growth: ”IDOL product” revenue of $62m this time was in contrast to $47m in Q1. It said at the time of the Q1 results on April 21 that it had $10m of hardware inventory, which most understood to be its Arcpliance archiving and ECA appliance. It said it had already sold most of that in Q2. That is a new product, so if that $10m is removed from the $62m (since it’s recognized as up-front license revenue), and a little bit more is taken off for sales to federal government via the recently-acquired MicroLink (Autonomy trumpeted a multimillion dollar federal deal in Q2), then you get very close to the $47m figure from Q1, and thus, next to no organic growth. That compares to the company’s claim of 19% organic growth for IDOL in the quarter and 13% across all products and services.

Speaking on CNBC today, former Apple CEO John Sculley said questions about revenues — always a hot topic in fast-growing tech companies — are the big thing to ask in a deal like HP’s purchase of Autonomy. He singled out Autonomy’s bundling of high-margin software with low-margin hardware, how the company deferred recognition of future revenues, and the incentives it offered to re-sellers as questions worth asking.

“The one thing you know in these kind of businesses is revenue recognition is the single biggest issue,” he said. “These are things that any experienced operating executive would be asking about.”

And one more person who thinks it’s strange HP didn’t identify irregularities at the company during its diligence process? Autonomy’s former CEO Mike Lynch, speaking with the WSJ’s Ben Rooney today:

“The figures are just mad. You are talking about handing them an asset worth $12 billion and they are saying $9 billion of that they are taking off. That would be such an obvious massive thing with 300 people and all these firms doing due diligence, how could you possibly not spot it?”

Yes, would be great if we could all manage to take responsibility for ourselves in the way you’ve described.

1:38 pm December 31, 2013

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